Process: 82/2019-T

Date: July 1, 2019

Tax Type: Outros

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 82/2019-T) addresses critical procedural issues when the Portuguese Tax Authority (AT) revokes a tax assessment after arbitration proceedings have commenced. The case involved a Personal Income Tax (IRS) assessment that was revoked by AT after the arbitral tribunal had been constituted but before a final decision. The tribunal examined whether it retained competence to rule on the taxpayer's subsidiary claims for tax refund and compensatory interest (juros indemnizatórios) despite the revocation. The arbitrator determined that supervening uselessness of proceedings (inutilidade superveniente da lide) did not apply because the harmful effects of the original unlawful assessment persisted—specifically, the taxpayer had not been refunded the tax paid nor received compensatory interest. Applying Article 13(1) of RJAT, the tribunal found it retained material competence since AT had not notified the CAAD president of the revocation within the statutory 30-day period after being informed of the arbitration request. The decision clarifies that when AT revokes an assessment after tribunal constitution, but fails to remedy all consequences (refund and interest), the arbitral proceedings continue regarding those outstanding claims. This ruling establishes that compensatory interest becomes due when AT's error is demonstrated by the subsequent revocation, following Supreme Administrative Court precedent. The decision is significant for tax practitioners as it protects taxpayers' rights to complete remediation, not merely administrative revocation, and confirms CAAD's jurisdiction over ancillary financial claims even after the principal administrative act is withdrawn.

Full Decision

ARBITRAL DECISION

I – REPORT

A..., taxpayer..., resident at ... no...., ..., ...-... Lisbon, in the capacity of tax representative of B..., taxpayer no...., hereinafter designated as the Claimant, submitted on 08/02/2019 a request for constitution of an arbitral tribunal and for arbitral pronouncement, in which it requests the annulment of the act of tacit rejection of the gracious appeal presented regarding the Personal Income Tax (IRS) assessment no. 2018... and the reimbursement of the amount of tax paid, plus compensatory interest.

The Honorable President of the Deontological Council of the Centre for Administrative Arbitration (CAAD) designated Francisco Nicolau Domingos as arbitrator on 02/04/2019.

On 23/04/2019 the arbitral tribunal was constituted.

On 24/04/2019 the Respondent came before the tribunal to inform that it had proceeded with the revocation of the challenged act.

Considering that the information contained in the revocation order and its respective grounds did not state that the Respondent had proceeded with the reimbursement of the tax amount that the Claimant alleges to have paid or of the compensatory interest, the tribunal determined, pursuant to the principles of autonomy of the arbitral tribunal in the conduct of the proceedings and in the determination of the rules to be observed with a view to obtaining, within a reasonable period, a pronouncement on the merits of the claims formulated and of cooperation, article 16, paragraphs c) and f) of the RJAT, on 04/05/2019 that the parties submit their views on this issue.

The Claimant, on 15/05/2019, came before the tribunal to inform that it had not been reimbursed the amount of IRS paid.

The tribunal, on 29/05/2019, considered that, despite the revocation of the act, the Claimant formulates a request for reimbursement of the amount of tax paid and for condemnation of the Tax and Customs Authority (AT) in the payment of compensatory interest, and thus determined, pursuant to the principle of autonomy of the arbitral tribunal in the conduct of the proceedings and in the determination of the rules to be observed with a view to obtaining, within a reasonable period, a pronouncement on the merits of the claims formulated (article 16, paragraph c) of the RJAT), the waiver of holding the meeting referred to in article 18 of the RJAT, granted 8 days for the parties, if they so wished, to present their final written submissions and set a deadline for issuing the arbitral decision.

POSITION OF THE PARTIES

The Claimant, in the request for arbitral pronouncement submitted on 08/02/2019, requests the annulment of the Personal Income Tax assessment no. 2018... which was the subject of the gracious appeal, on the ground of error regarding the prerequisites.

However, the Respondent communicated to the tribunal on 24/04/2019 the revocation of the Personal Income Tax assessment. However, the revocation order contained no reference to the reimbursement of the tax or the payment of compensatory interest – subsidiary claims, so the tribunal determined the notification of the parties to submit their views on the matter.

The parties being notified to submit their views if they so wished, the Claimant stated that it had not been reimbursed the amount of tax paid, nor had it received the compensatory interest.

The tribunal is bound by official knowledge of dilatory exceptions, article 578 of the Code of Civil Procedure (CPC), applicable pursuant to article 29, paragraph 1, paragraph e) of the RJAT. Therefore, it must be determined whether, in the concrete case, the exception of material incompetence of the tribunal to appreciate the request for reimbursement and condemnation in the payment of compensatory interest is met, or whether there is supervening inutility of the dispute.

Therefore, these are the questions that the tribunal must address:

i) Whether there is material incompetence of the tribunal to appreciate the request for reimbursement and condemnation in the payment of compensatory interest;

ii) Whether the instance should be dismissed as extinct due to supervening inutility of the dispute;

iii) Whether compensatory interest is due.

PRELIMINARY ISSUES AND CASE MANAGEMENT

Material incompetence of the arbitral tribunal

Supervening inutility of the dispute prevents the continuation of proceedings for judgment and drafting of the award, and the grounds thereof are based on the unnecessary use of the proceedings, since there is no need for judicial protection.

However, in the concrete case, the Claimant formulated the request for annulment of the Personal Income Tax assessment and restitution of the unduly paid tax, plus compensatory interest.

However, the Respondent, by order dated 18/04/2019, communicated on 24/04/2019 the revocation of the Personal Income Tax assessment act which was the subject of the gracious appeal.

Therefore, the question may be raised: does the tribunal have competence to appreciate the requests for reimbursement of tax and condemnation in the payment of compensatory interest?

Doctrine holds, regarding judicial challenge, a procedural means that inspired the legislator in the provision of our tax arbitration system, that: "If, pending the challenge, after the deadline referred to in articles 111, paragraph 1, and 112, paragraph 1, of the CPPT, a revocatory act is practiced without new regulation of the legal situation, but effects produced by the revoked act persist, the challenge proceedings continue in relation to those effects (article 65, paragraph 1, of the CPTA)".

In the present case, the damage caused by the practice of the revoked act persists in the legal order, since there is no information of the reimbursement of the amount of Personal Income Tax and the payment of compensatory interest, which is why it is necessary to continue the procedural process regarding these claims.

In this regard, case law holds that: "Having the Tax Administration come to annul ex officio the tax assessments, during the pendency of the judicial challenge instituted against such assessments and where in addition to requesting the annulment of these tax acts compensatory interest was also claimed, this fact is in itself demonstrative of error attributable to the services and determinative of payment of interest under article 43 of the LGT", decision of the Supreme Administrative Court issued in the context of case no. 0574/14, of 07/01/2016 with Counselor FONSECA CARVALHO as rapporteur.

Furthermore, article 13, paragraph 1 of the RJAT determines that: "In requests for constitution of arbitral tribunals having as their object the appreciation of the legality of tax acts provided for in article 2, the highest official of the tax administration service may, within a period of 30 days from knowledge of the request for constitution of the arbitral tribunal, proceed with the revocation, ratification, reform or conversion of the tax act whose illegality has been raised, practicing, when necessary, a substitute tax act, and must notify the president of the Centre for Administrative Arbitration (CAAD) of its decision, whereupon the counting of the deadline referred to in paragraph c) of paragraph 1 of article 11 shall commence".

It so happens that, in the present case, the Respondent only gave notice of the revocation after the constitution of the arbitral tribunal, more specifically, after being notified to submit its response. Or, put differently, the president of CAAD was not notified of any decision within that 30-day period.

Thus, the tribunal is materially competent to appreciate the request for reimbursement of the tax (Personal Income Tax) and for condemnation of the AT in the payment of compensatory interest, and the dilatory exception under appreciation is not verified.

Supervening inutility of the dispute

The Claimant requests, in its request for arbitral pronouncement, the annulment of the Personal Income Tax assessment act, the reimbursement of the unduly paid tax and the condemnation of the Respondent in the payment of compensatory interest.

It so happens that the Respondent came to communicate the revocation of the assessment and, notified to submit its views, the Claimant came to declare that it had not been reimbursed the amount of tax paid, nor had it received compensatory interest.

Thus, this tribunal must verify the usefulness of knowledge of the request for annulment of the Personal Income Tax assessment, reimbursement of tax paid and condemnation in compensatory interest.

Supervening inutility of the dispute is verified when, pending the case, the solution of the dispute ceases to have useful effect.

In the concrete case, the Claimant formulates a request for annulment of the decision of the gracious appeal and, in final terms, of the Personal Income Tax assessment; as well as reimbursement of the amount of tax paid and condemnation in the payment of compensatory interest.

It happens that the annulment purpose intended by the Claimant regarding the Personal Income Tax assessment has already been achieved, whereby knowledge of the defects attributed to the assessment act is prejudiced. Thus, there is usefulness only regarding the request for reimbursement of tax paid and condemnation of the AT in the payment of compensatory interest.

Consequently, supervening inutility of the dispute is verified regarding the request for annulment of the Personal Income Tax assessment, which determines the extinction of the instance – article 277, paragraph e) of the CPC, applicable pursuant to article 29, paragraph 1, paragraph e) of the RJAT.

Case Management

The proceedings do not suffer from nullities, the arbitral tribunal is regularly constituted and is materially competent to know and decide the request for reimbursement of the amount of Personal Income Tax paid and condemnation in the payment of compensatory interest, consequently the conditions for issuing the final decision are met.

II – GROUNDS

FACTUAL MATTER

1. Facts considered proven

1.1. The Claimant was notified of the additional Personal Income Tax assessment no. 2018..., relating to the year 2014, in the amount of 75,441.99 euros and of the statement of account settlement no. 2018..., in the final amount payable of 48,292.62 euros (document joined by the Claimant under no. 2).

1.2. The Claimant submitted a gracious appeal regarding such act on 11/06/2018 (document joined by the Claimant under no. 2).

1.3. Until the presentation of the request for arbitral pronouncement no decision was issued on the aforementioned gracious appeal.

1.4. On 18/04/2019 the Personal Income Tax assessment act was revoked (document joined with the request of the Respondent informing of the revocation of the act).

1.5. The Director-General of the AT had knowledge of the request for constitution of the arbitral tribunal on 18/02/2019 (CAAD computer system).

1.6. The Respondent communicated to the file on 24/04/2019 the revocation, by order dated 18/04/2019, of the Personal Income Tax assessment act which was the subject of the gracious appeal (document joined with the request of the Respondent informing of the revocation of the act).

1.7. The above-described assessment was paid on 04/03/2018 (document joined by the Claimant under no. 2).

1.8. The request for arbitral pronouncement was presented on 08/02/2019 (CAAD computer system).

2. Facts not considered proven

There are no other facts with relevance to the arbitral decision that have not been given as proven.

3. Grounds of the factual matter considered proven

The facts pertinent to the judgment of the case were chosen and delimited according to their legal relevance, in light of the plausible solutions of the questions of law, in accordance with the combined application of articles 123, paragraph 2, of the Code of Tax Procedure and Process (CPPT), 596, paragraph 1 and 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, paragraphs a) and e) of the RJAT.

With regard to the facts proven, the arbitrator's conviction was based on the positions assumed by the parties, which were consensual, and on the critical analysis of the documentary evidence joined to the file.

LEGAL MATTER

It is therefore necessary to address the request for reimbursement and condemnation in the payment of compensatory interest.

In this regard, article 100 of the General Tax Law (LGT), applicable by reference from article 29, paragraph 1, paragraph a) of the RJAT, provides that: "The tax administration is obliged, in case of full or partial success of gracious appeals or administrative remedies, or of judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in the terms and conditions provided by law". That is, the judicial annulment of the act implies the destruction of its effects ex tunc, that is, everything must occur as if the act had not been practiced.

Now, the reconstitution of the current hypothetical situation is based on the obligation to reimburse the tax that was paid. Reason for which, in the concrete case, given the illegality of the assessment, there is indisputably a place for reimbursement of the amount of Personal Income Tax paid by the Claimant.

Secondly, article 43, paragraph 1 of the LGT provides that: "Compensatory interest is due when it is determined, in a gracious appeal or judicial challenge, that there was error attributable to the services which resulted in payment of the tax debt in an amount higher than legally due". In other words, there are three requirements for the right to such interest: i) existence of an error in a tax assessment act attributable to the services; ii) determination of such error in a process of gracious appeal or judicial challenge and iii) payment of a tax debt in an amount higher than legally due.

In this manner, it is possible to formulate a question: is it admissible to determine the payment of compensatory interest in a tax arbitral process? The answer to the question is affirmative. Indeed, article 24, paragraph 5 of the RJAT provides that: "Payment of interest, regardless of its nature, is due in the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process".

And given the revocation one may ask: is there error attributable to the services in the present case?

The answer to the question must be affirmative, the revocation of the act demonstrates the error attributable to the services, that is, the recognition of the lack of normative support when it was practiced.

Consequently, the request for compensatory interest is merited, calculated at the legal rate, in accordance with article 43, paragraph 4 of the LGT, between the date on which the undue payment was made and until full reimbursement.

III – DECISION

In these terms and with the grounds described above, it is decided to:

i) Dismiss the instance with respect to the request for declaration of illegality of the Personal Income Tax assessment act, due to supervening inutility of the dispute, in accordance with article 277, paragraph e) of the CPC, applicable pursuant to article 29, paragraph 1, paragraph e) of the RJAT;

ii) Judge the request for reimbursement of the amount of tax delivered and condemnation of the AT in the payment of compensatory interest as well-founded, from the date of payment until full reimbursement.

VALUE OF THE CASE

The value of the case is fixed at 48,292.62 euros, in accordance with article 97-A of the CPPT, applicable pursuant to article 29, paragraph 1, paragraph a) of the RJAT and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

COSTS

Costs to be borne entirely by the Respondent, in the amount of 2,142 euros, in accordance with article 22, paragraph 4 of the RJAT and Table I annexed to the RCPAT, since, in accordance with article 536, paragraphs 3 and 4 of the CPC, applicable pursuant to article 29, paragraph 1, paragraph e) of the RJAT, the constitution of the arbitral tribunal is attributable exclusively to the Respondent which, notified of the request for constitution of the tribunal with the purpose of appreciation of the legality of the tax act provided for in article 2, paragraph 1 of the RJAT, did not inform the president of CAAD of its revocatory decision within the period provided for in article 13, paragraph 1 of the RJAT.

Notify.

Lisbon, 1 July 2019

The Arbitrator,

(Francisco Nicolau Domingos)

Frequently Asked Questions

Automatically Created

What happens when the Tax Authority revokes a tax assessment after an arbitration request has been filed at CAAD?
When the Tax Authority revokes a tax assessment after an arbitration request has been filed at CAAD, the proceedings do not automatically terminate. Under Article 13(1) of RJAT, the Tax Authority has 30 days from knowledge of the arbitration request to revoke the act and notify the CAAD president. If revocation occurs after the tribunal is constituted and the harmful effects persist (such as unreturned tax payments or unpaid compensatory interest), the tribunal retains competence to rule on these outstanding claims. The case does not become moot if the taxpayer has not been made whole through refund and interest payments, as the damage caused by the unlawful act remains in the legal order.
Is the taxpayer entitled to a refund of IRS tax paid after the revocation of an unlawful tax assessment?
Yes, a taxpayer is entitled to a full refund of IRS tax paid following the revocation of an unlawful tax assessment. The revocation by the Tax Authority constitutes an implicit acknowledgment that the assessment was erroneous. Beyond mere administrative revocation, the taxpayer must receive actual restitution of amounts paid, plus compensatory interest. The CAAD arbitral tribunal has material competence to order this refund and interest payment even after revocation of the principal act, as the harmful financial effects of the illegal assessment persist until complete restitution occurs. The tribunal will continue proceedings specifically to address these financial remedies.
What are compensatory interest (juros indemnizatórios) and when can they be claimed in Portuguese tax arbitration?
Compensatory interest (juros indemnizatórios) in Portuguese tax law are interest payments owed to taxpayers when they have paid taxes based on unlawful assessments, compensating them for being deprived of their funds. Under Article 43 of the General Tax Law (LGT), these are due when there is an error attributable to tax services. In tax arbitration, they can be claimed as a subsidiary request alongside annulment of the tax act. Supreme Administrative Court jurisprudence establishes that when the Tax Authority itself revokes an assessment during pending proceedings, this demonstrates error attributable to the services, automatically triggering entitlement to compensatory interest. The tribunal has jurisdiction to order payment of these interest amounts even after the underlying assessment has been revoked.
What does supervening uselessness of proceedings (inutilidade superveniente da lide) mean in Portuguese tax law?
Supervening uselessness of proceedings (inutilidade superveniente da lide) is a procedural exception in Portuguese tax law that occurs when continued litigation becomes unnecessary because there is no longer a need for judicial protection. This typically arises when the contested administrative act is revoked or when the legal situation is fully resolved during proceedings. However, this exception does not apply when harmful effects of the original unlawful act persist. In tax arbitration at CAAD, if a tax assessment is revoked but the taxpayer has not received a refund of taxes paid or compensatory interest, the proceedings are not rendered useless—they continue to address these outstanding financial remedies that constitute ongoing damage requiring judicial intervention.
Can CAAD arbitral tribunals still rule on tax refunds and compensatory interest after the main tax act has been revoked?
Yes, CAAD arbitral tribunals retain full jurisdiction to rule on tax refunds and compensatory interest even after the main tax act has been revoked. This competence derives from the principle that revocation alone does not eliminate all harmful effects of an unlawful assessment. The tribunal's material competence persists under Article 16(c) of RJAT based on the autonomy principle in conducting proceedings. Following the precedent that 'effects produced by the revoked act persist,' arbitration continues regarding financial consequences. This is particularly true when the Tax Authority revokes after tribunal constitution without notifying the CAAD president within the statutory 30-day period, or when revocation occurs without simultaneously providing refund and interest. The tribunal must ensure complete remediation of the taxpayer's legal situation, not merely address the administrative act's formal validity.